Spiraling debt is Uncle Sam’s shock collar, and its jolt may await like an invisible pet fence.

“Nobody knows when you bump up against the limit, but you know when it happens it will really hurt,” said fiscal watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget.

The great uncertainty about how much debt is too much has tended to make fiscal discipline seem less urgent, rather than more. There is no obvious threshold beyond which investors will demand higher real yields for holding U.S. debt. Vague warnings from ratings agencies about the loss of America’s ‘AAA’ status haven’t added much clarity — until recently.

In the wake of the financial crisis and recession, Moody’s Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.

The key data point in Moody’s view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody’s managing director Pierre Cailleteau confirmed in an e-mail.

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.

But under more adverse scenarios than the CBO considered, including higher interest rates, Moody’s projects that debt service could hit 22.4% of revenue by 2013.

The principal impact of a downgrade to AA would be the fact that the U.S. would be required to pay higher interest rates on it’s debt, which itself would increase overall debt thus making the entire thing a self-fulfilling prophecy of collapse.

3 Responses to “The Coming U.S. Debt Shock Of 2018, Or Maybe Sooner”

What’s the ultimate outcome of this, then, for the average U.S. citizen? Inflation? Huge cuts in social services and huge rises in tax rates? Astronomical unemployment? I’m guessing it’s all three, but for someone like me without a solid education in finance, sometimes it can be easy to get lost in trying to understand the numbers and end up missing the actual real-life implication.

So pretty much: “Look at Greece and get ready for that on an even larger scale”?

In re Chris Berez’ post, we’re not completely doomed. We’ll probably lose a
bunch of government hands-outs,but we’ll also lose a bunch of regulations that
kill our ability to form new businesses, create new goods and services, and
regain some control over our own lives. Bring it on!

Inflation. Currently the US dollar is the reserve currency of many countries around the world, not to mention all trading in oil is done in US dollars. If the world gets the notion that all of these (tens of trillions) of dollars they are holding are not so valuable any more, they will start dumping them onto the markets. A huge flood of dollars means their value goes down, way down, and anything priced in dollars goes up, way up.